Move to enhance depositors’ confidence :

Mandatory deposit insurance scheme will have positive impact

Charumini de Silva

Central Bank Governor Ajith Nivard Cabraal said that a mandatory deposit insurance scheme should be set up, as it will have a positive impact on the industry. This would enhance depositors’ confidence and it would be a self-corrective mechanism where companies would not have to take it as a burden. The mandatory deposit insurance scheme will also help to strengthen the financial system.

Central Bank Governor, Ajith Nivard Cabraal

He was speaking at a seminar on “Statutory and Regulatory Requirements for Registered Finance Companies and Specialized Leasing Companies” at the Galadari Hotel yesterday.

The Governor said during the past six years the assets and liquidity of Registered Financial Companies (RFC) had improved sharply.

The RFC assets grew from Rs.140.7 billion to Rs.175.6 billion in 2008 and the liquid assets (available amount) recorded a growth of Rs.18.1 billion compared to Rs.13.9 billion in 2007. There was a decline in the RFC capital adequacy and profitability.

Though the end of 2008 was disappointing the Specialized Leasing Companies (SLCs) recorded an improvement in assets, capital and borrowings while there was a decline in profitability.

The SLC assets increased from Rs.95.54 billion to Rs.109.92 billion in 2008 and borrowings grew from Rs.66.96 billion in 2007 to Rs.77.09 billion in 2008. The SLC total capital funds increased from 16 percent to 18.54 percent in 2008, he said.

Cabraal said there was a similar performance in RFC and SLC industries and considering these figures we need to improve productivity in these areas, as we need to continue the growing impetus. Several weaknesses have also been noticed in RFCs and SLCs for which a mechanism was developed to counter weak corporate governance practices, weak internal controls, inadequate capital, lack of contingency liquidity planning and weakness in risk management.

None of the employees could rely only on the company’s chief as each employee has his or her own responsibility and the entire group should be responsible for the company’s faults.

As the regulatory bodies of all financing companies in the country, the Central Bank accesses all operations under all circumstances since we have a proper plan. We need to improve further since, there are several challenges remaining such as maturity mismatches of assets and liabilities, lack of contingency arrangements to ensure business continuity, comparatively high cost of funds, highly concentrated and limited business operations and insufficient professionals in management, he said.

He said there is much scope for RFCs and SLCs in the SME sectors. All RFCs and SLCs must endeavour to have at least one dedicated centre/division/window to cater to the needs of SMEs.

By allocating a specified amount for credit to SMEs and building capacity to impart skills and advice, the RFCs and SLCs could support the SME sector.

The financial industry should approach the market by innovative products. A few alternative mechanisms to enhance resources and develop new and more stable funding lines have been advocated for innovative products, which the industry needs to adopt.

Implementing effective collection procedures and delivering credit on time is another factor, which the RFCs and SLCc should maintain, Cabraal said.

The RFC and SLC industries should improve their corporate governance while observing the corporate governance of others since a collapse of a company would affect the whole industry.

Improving productivity, taking responsibility, as directors and risk management are some of the vital areas that the industry should consider, he said.

Prosperity will not occur automatically. It can be achieved only with high commitment, intense dedication, careful planning and effective implementation. Therefore, this is the time for all of us to build our nation and to stabilize our country’s economy, the Governor said.